RPM

A couple of weeks ago, Marketo announced its research-based belief that its form of revenue performance management (RPM) could help grow global GDP by $2.5 trillion by 2015. I love it when emerging companies talk about big plans this way. It reminds me of the young plumber who upon seeing Niagara Falls for the first time says, “I think I can fix it!”

But there’s something to this proposal that ought to be taken seriously and when you talk about trillions of dollars you are presumably talking seriously. Global GDP in 2011 is predicted at $68.65 trillion by the International Monetary Fund and the Marketo announced figure was spread over three years. But that’s a lot of improvement no matter.

To put this into perspective you have to back up and ask about the assumptions involved and Marketo was kind enough to anticipate the questions and perform a little research. According to the announcement, Marketo did some analysis of its customers’ revenues as they took advantage of the company’s marketing automation, sales effectiveness and analytics tools.

Side note: No one’s crown jewels were harmed in the analysis. Having a big pile of relatively homogeneous data for analysis is a side benefit of multi-tenant cloud computing. Multi-tenant cloud computing could provide important analytic benefits like this to all users if we could only 1) Put down some ground rules governing the use of the aforementioned crown jewels, thus creating a data commons; and 2) Get over our hang-ups about maintaining the pristine nature of our data in clouds. Really, it’s like the five year-old who can’t stand seeing the peas touching the mashers on the plate. But I digress.

The three tools, marketing automation, sales effectiveness and analytics, combine to provide the tools a company needs to implement revenue performance management strategies. RPM is still a relatively new idea but other companies like Eloqua, with whom Marketo competes and Cloud 9 Analytics (a Marketo stable mate in venture capitalist Bruce Cleveland’s menagerie) are conspiring to give the idea critical mass.

In the nub, RPM is simply about using the data that is routinely given off by our business processes as fodder for the analytics engine. Too often the data goes unused or simple reporting engines choke on the abundance. But an analytics engine spits out all kinds of ideas like what to offer the customer based on its experience, or generally offering insight that a human eye might miss but which a statistical model would discover easily.

So, two and a half trillion bucks over three years averages out to a bit less than one percent a year. In percentage terms that is not much but the existence of all the zeros in a trillion will get your attention. After all, that’s growth and incremental improvements like this are how markets and economies grow.

More importantly, the ROI can be stunning. Given the fact that RPM would not be applied evenly across big corporations and lemonade stands, the places where it could make a difference would notice the change. Moreover, the cost of implementing RPM where it’s needed would be much less than the incremental gains, especially with modern cloud computing delivering the tools cost effectively.

I am not an expert on RPM, yet. I am more like the one eyed man in the land of the blind. But my thought is that we ought to get familiar with this idea, which is essentially applied analytics. Our economy is still climbing out of the recession and the jobs numbers that I have seen for May are disappointing. Every recession ends with some new product or idea taking off and leading the way. I haven’t seen the big new idea yet but maybe this is it. Regardless, a little investigation won’t cost anything.

Thumbing through the current issue of Wired, I came upon a multi-page ad spread from Microsoft and I saw what looks like an interesting juxtaposition, though there was nothing in the ad itself that made the connection. I have also been interviewing some of the industry’s best and brightest recently on the subject of revenue performance management or RPM and the combination provided the source of my fascination.

The Microsoft ad is about the “Cloudcycle, A Hybrid Model” which discusses both private clouds — an oxymoron as far as I am concerned — and public clouds, private clouds’ counterpart. The purpose of this piece is not to discuss whether clouds should be free or if it’s even logical to privatize a cloud. I’ve written on this before. My interest in the ad is in the middle by the fold — it’s the 70/30 shift in which Microsoft says, “…seventy percent of the IT budget is spent on sustaining and running basic IT operations and thirty percent for increasing business value through IT innovation.”

Seventy-thirty is about right and it’s a ratio we’ve been familiar with for a long time. Microsoft is right in highlighting that with cloud computing, “…CIOs and IT leaders can spend less time keeping the lights on, and devote more time to driving innovation to increase business value.”

What I find somewhat ironic and interesting is that where IT is becoming more strategic and creative, departments like marketing are becoming more tactical and quantitative (which can drive strategy!). In interviews with Phil Fernandez, CEO of Marketo, Bruce Cleveland a VC with InterWest Partners and former Siebel executive and Thor Johnson, the pioneering former CMO of Eloqua and leader of his own Team Thor Marketing, all three tell the same story about marketing.

It’s rather simple, marketing and marketers need to learn to speak the language of the C-suite about revenue, ROI and investment in order to take a seat at the table with these executives. The language of clicks, impressions and booth space, is still relevant but it’s not something the C-suite ever got comfortable with. Marketing’s big job is to build bridges to the other side with talk about cost per lead, revenue per lead and revenue from specific programs. As Phil Fernandez told me:

“When a marketer appears in a CFO’s office and uses language like that the CFO first thinks, “Who are you and what did you do with my head of marketing?!” But the second thing the CFO thinks is, “Wow! This is incredible, let me open my mind to investing more and to how those investments are actually driving revenue.” It’s transformative for the way an organization can work.

Indeed it is.

So the interesting point for me is that at this moment IT and marketing (and other front office departments too) appear to be going in opposite directions. Marketing is becoming more quantitative and IT is becoming more flexible, strategic and creative in its own way. But look a little deeper and the two are in violent agreement. Each is striving to think outside of the box and deliver something new that is more flexible and provides more business agility.

Even more interesting to me is that much of this is driven, at least to a degree, by tight resources. IT has learned that the budget is not as elastic as their applications need to be and marketing is learning the same thing plus value of quantitative analysis. In the face of those necessities, if you can call them that, innovation is blooming.

I hope these shifts are permanent — better, faster and cheaper usually are — but they are just shifts and they eventually lead to new equilibria. As a new IT equilibrium is reached we can expect shrinking IT budgets (in inflation adjusted dollars) but for a long time there will still be a similar ratio of expenses going to support the existing infrastructure against expenses for innovation, at least because we’re comparing a high cost on-premise regime to low cost SaaS. In a so-called private cloud, all bets might be off if the cloud is owned by IT or its costs are equivalent to in-house systems. But what would the world look like if the ratio actually flipped, if IT spent more on strategy and innovation than on keeping the lights on?

The same is true for marketing. Marketing’s creative side isn’t going away, it can’t. As Fernandez said later in our interview:

“I sometimes worry that all this talk about the quantitative side of marketing is losing sight of the creative dimension of marketing, which is important too…you still have to deliver content to the customer because that’s part of the equation of what marketing has to sell. Marketing doesn’t have widgets to sell, it has ideas.

Much the same argument can be made for sales and service in the front office and what we’re left with is IT in some ways catching up with the way we work in the front office while the denizens of sales, marketing and service learn to be better corporate citizens. It is ironic and wonderful that this invention is driven by basic necessity.

Phil Fernandez, CEO of Marketo, is our latest thought leader interview subject on the Beagle website (http://beagleresearch.com). Phil’s career started in the analytics boom of the 1980s and he’s been successfully bringing analytics closer to the customer with every iteration of a career that includes companies like e.piphany and several others. Lately analytics has taken on even greater importance as he and other Silicon Valley leaders have begun talking about the importance of embedding analytics in line of business applications. The shorthand message for all this is, typically, embedded in the movement’s tag line — Revenue Performance Management or RPM. Who doesn’t like revenue? RPM strikes a nerve for any CEO worth his or her BlackBerry and that’s is why this interview is a must-read.